The recent addition of clause ‘h’ to Section 43B of the Income Tax Act has stirred up considerable debate within India's MSME sector

The latest insertion of the new clause ‘h’ to Section 43B of the Income Tax Act is making quite some feathers in the MSME sector in India. According to this clause, an MSME enterprise needs to be paid for the goods bought from it within 15-45 days of the purchase to claim a deduction in the assessment year 2024-25.

This means that the rule of Section 43B of allowing certain deductions on actual payments has been extended to payments due to MSMEs and the period for these MSME payments is as specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act). As of now, the applicability of this new clause will be effective from April 1st, 2024. In case of non-payment by 31st March 2023, the unpaid sum will be added to the income of FY 2023-24.

The MSME sector has metamorphosed itself into a prominent sector contributing significantly to the country’s economic growth in many ways including, employment generation and integrating itself into the overall industrial development by associating with large industries as their auxiliary partners. According to the 73rd round of the National Sample Survey conducted by the Ministry of Statistics & Programme Implementation during 2015-16, India has 633.88 lakh MSMEs involved in various economic activities and generating a sizable 11.10 crore jobs.

One of the long-plaguing problems of MSMEs has been untimely payments leading to choked cashflows. With the insertion of this new clause, the Government hopes to resolve this perplexing problem. One estimation suggests that the annual total delayed payments to the MSME sector stand somewhere between Rs. 10.5 -11.0 lakh crore.

Applicability

Type of enterprises - Section 43B(h) applies only to enterprises, i.e., to entities engaged in either Manufacturing or Service sector.

Period – This section is applicable from the FY 2023-24 or the assessment year 2024-25 onwards. It is, however, not applicable to any payment outstanding to MSMEs as of 31.03.2023.

Type of expenses – Section 43B(h) is not applicable for the outstanding payments to suppliers of raw materials as the purchase of raw materials is not considered as a business expenditure for this section.

Deductions - By incorporating the new clause ‘h’ in Section 43B, business expenses will be allowed as deductions only in the year of payment.

This is a departure from this section where the expenses are allowed as deductions on payment on or before the filing of the income tax return. So as long as the payments are made to MSME suppliers within the financial year, i.e., before 31st March, the deductions will be allowed in that financial year.

Impact on Business

This will surely make their cash flow healthier. However, there may be adverse impacts as well. Companies may not want to be in an unavoidable situation of adhering to the 15-45 days payment cycle and may start switching from MSMEs to medium to large corporations as their suppliers.  There is still a large grey area as to how these transactions would work. 

The way forward

The government may want to consider allowing time to buyers to make payments to MSMEs till the time of filing returns as it is permitted in other clauses of Section 43B. Extension of the payment time from 15 or 45 days to at least 60 days will give a breath of relief to a lot of businesses.

Additionally, it would be a tedious task for both business owners and auditors to identify MSME suppliers and scrutinise the actual payment dates. The Government should consider extending the implementation date by one year to facilitate better understanding and smoother implementation.

(The writer is a business consultant; views are personal)